NO, there are no wash sale implications in this case, because you did not engage in any churning, because the transactions did not occur within a 30-day period, but were instead spaced at 3-month intervals (June 1, September 1, and December 1).
The IRS wash sale rule
IRS publication 550, page 56 states:
Wash Sales
You cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stock or securities at a loss, and within 30 days before or after the sale you:
1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a fully taxable trade, or
3.Acquire a contract or option to buy substantially identical stock or securities.
If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.
If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities. The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities begins on the same day as the holding period of the stock on securities sold.
What this means in Plain English:
This means that if you close a trade at a loss, and then buy back the same, or ';substantially'; the same equity such as an option on that equity, you cannot take the loss at that time. According to the IRS, the loss now has to move forward, and has to be attached to the cost basis of the trade in which you bought back the same equity.
If that trade now ends in a loss, and you buy the same equity again, the loss gets moved forward again. This can keep happening indefinitely if you continue to keep trading the same equity again and again, and keep ending up with an accumulated loss, and do not stop trading this equity for at least 31 days.
Negative Consequences:
If the repurchased shares that triggered the wash sale were 1) held open at year end or 2) purchased in January of next tax year, the IRS says that the loss is disallowed for the current tax year and the loss gets moved forward to next tax year, or whatever year you finally dispose of those shares.
You lost the money this year, but the IRS says you cannot take the loss until next year or later!
In addition, the holding period of a trade may change due to a wash sale. For example, if you close a long term holding at a loss and then buy it back within the 30 day window, the loss moves forward to the cost basis of the new trade, and your holding period for the new trade begins on the same day as the holding period of long term trade. So even if you close the new trade in less than a year, the IRS requires you to report this new trade as a long term gain or loss.
When short selling stocks:
The IRS wash sale rule is a bit different when it comes to short selling stocks (sell stock short).
IRS publication 550 page 56 states:
Short sales. The wash sales rules apply to a loss realized on a short sale if you sell, or enter into another short sale of, substantially identical stock or securities within a period beginning 30 days before the date the short sale is complete and ending 30 days after that date.
Therefore, if you cover, or buy back, your short sale shares at a loss and then sell short the same stock again within the 30 day period, you have a wash sale, and the loss becomes part of your future cost basis when you finally cover the short. This is a bit different in the sense that a sale has triggered the wash sale rather than a purchase.
Because TradeLog accurately matches short sale positions as well as long positions, we are able to properly handle this particular part of the wash sale rule.
Wash Sales between stocks and options:
Today's active trader has many different trading instruments available to him, and many traders often use a combination of these instruments. Once such combination is trading both stocks and options on stocks. Buying and selling a certain stock and then buying an option on the same underlying stock may seem to be two separate and distinct transactions, but the IRS may choose to differ when it comes to what triggers a wash sale.
The IRS uses the phrase ';substantially identical'; when it discusses what triggers a wash sale.
IRS publication 550 page 56 states in part:
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
3. Acquire a contract or option to buy substantially identical stock or securities.
What this means for the stock and options trader is that if you take a loss on a stock or an option, and then buy back that same stock, or an option on that same stock, whether the option is the same month and strike price or not, you have a wash sale. The same holds true if you close an option position for a loss and then buy the same underlying stock within the 30 day window.
There is no clarification in the tax law as to how far ';in or out of the money'; the option is, or what month and year the option expires. So TradeLog鈩?simply applies this rule as follows: If the underlying stock is the same, then the option is ';substantially'; the same.
TradeLog鈩?and Option Trades as reported by Online Brokers:
There is absolutely no standards as to how your brokerage reports stock option trades. Some brokers simply use an option symbol which changes from year to year. Other brokers report these with varying descriptions such as including the underlying stock ticker or description, the expiration month and year (some do not specify the year which is a problem for leaps), the strike price, and whether it was a put or a call.
If there is enough information in the online trade history reports that get imported, TradeLog鈩?will describe option trades with the long hand notation of the underlying stock symbol, followed by a space, followed by the expiration month and year, followed by a space, followed by the strike price, followed by a space, followed by the word ';PUT'; or ';CALL.'; This makes it very easy to spot option trades when viewing your trades in TradeLog as well as allowing us to match stock and option trades on the same securities for wash sale calculations.
ex: ';MSFT DEC04 45 CALL';:
If your broker does not provide enough information to properly identify the option as described above, or if only the option ticker symbol is available in the trade history, then TradeLog cannot possibly match these to the underlying stock. This is one of the problems in this industry where absolutely no standard exists for trade history reporting beyond the basics included in the brokerage 1099.
The TradeLog Change Option Tickers command converts option ticker symbols into the standard long hand notation as described above. The benefit is that options across all brokers are reported consistently from within TradeLog so that the wash sale rule can be applied consistently across different brokerages.
Calculating wash sales can appear complicated:
The IRS expects you to record each and every wash sale throughout the tax year! For those of you who have ever tried to calculate wash sales for an entire year's worth of trade activity, I don't need to tell you just how painful this can be.
First you need to identify trades that have been closed at a loss. Then you have to scan backwards and forwards in time to see if you re-purchased the same or ';substantially the same'; securities within a plus or minus 30 day window.
If you did then, you need to record a wash sale adjustment line on your schedule d. You also need to adjust the cost basis of the re-purchase shares, moving the loss forward or backwards to this whatever trade triggered the wash sale.
Calculations get even more complicated when you do not re-purchase an equal number of shares:
Unequal shares:
It is inevitable that an active trader will occasionally (and possibly almost never) buy back an equal number of shares after realizing a loss. This is where the wash sale rule starts to really get complicated. IRS publication 550 page 56 states:
';More or less stock bought than sold. If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an unequal number of shares sold. Match the shares bought in the same order you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.';
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